Despite a growing economy and regulatory developments in the defined benefit sector, Ireland still faces challenges in its pensions system. Jerry Moriarty urges long-term considerations to form part of future pensions policy
Last year was good for the Irish economy and there were also positives for the pensions sector, although there is a general sense of standing still in policy development. The continued strong investment trend helped assets under management increase to €107.8bn, the highest level recorded and an increase from €63.5bn at the end of 2008. This has been achieved despite a government levy on pension assets which totalled almost €2.5bn, with the final payments made in 2015.
Of total pension assets, The Irish Association of Pension Funds (IAPF) annual investment survey showed that €67.4bn were in defined benefit (DB) schemes with the remaining €40.4bn in defined contributions (DC). The shift from equities continued, particularly in DB schemes, with a decrease from 47.5% to 42.5% and an increase in bonds and alternatives allocations. Equities still account for 52.2% of DC assets.
The fall in equity allocations reflects international trends as trustees look to de-risk and bank recent gains. It also reflects regulatory pressure, as 2016 sees the introduction of risk reserves. Thus, DB schemes will be required to hold additional reserves in respect of ‘risky’ assets. These are currently any assets other than cash, euro-zone government bonds and some euro-zone corporate bonds. It is expected that this will grow to include non euro-zone bonds and liability-driven investment (LDI).
With almost all DB schemes now closed to new entrants and greater numbers winding up, there has been a continuing focus on DC schemes. Many schemes, particularly after a switch from DB, provide higher contribution levels than they have done traditionally, usually on a matching basis. This has been reflected in the growing number of schemes achieving the IAPF Pensions Quality Standard. Trustees are looking at their default strategies to ensure they are appropriate, as well as at lifestyling options to ensure these reflect the benefit options available. This has resulted in greater innovation and, in some cases, individualised lifestyling that anticipates the option the member is most likely to take at retirement – cash, annuity or continued investment in an Approved Retirement Fund.
However, engagement continues to be a challenge. It can be a struggle to get members to join or to pay at the contribution levels that will ensure they have a decent pension at retirement. Communication is one issue and many are looking at how they correspond – both the methods employed and the messages delivered. It is clear that most people find pensions complicated and there are too many revenue and regulatory rules that need to be simplified.
The Irish regulator, the Pensions Authority, was busy in 2015, publishing financial management guidelines for DB schemes, a consultation on codes of governance for DC schemes and a consultation on trustee qualifications. The DC codes of governance will be published incrementally from January 2016.
The consultation on trustee qualifications triggered debate. While everyone agrees on the need for trustees to understand what is becoming a complex role, there was a lack of agreement on the level of professionalism required. Some argue for all trustees to be professionally qualified, that it is no longer a job for enthusiastic amateurs. Others, including the IAPF, see a need for greater education but do not believe that only having professional trustees is the solution. It is important that the trustees have some sense of the members whose money and futures they are looking after as well as the ethos of the sponsor. We would see a mix of professional and member nominated trustees as being a means of ensuring the trust of the members and the ability to evaluate complex financial transactions. It will be key to see how this debate evolves.
On pensions policy, the government announced in January last year that it was setting up a Universal Savings Retirement Group to “consider the factors involved in constructing an efficient and effective universal retirement savings system and bring forward a recommendation by the end of 2015 in the form of a road map and estimated timeline for introduction”. The group is made up of government departments and state bodies with some support from the UK Department of Work and Pensions as well as the OECD. Effectively, it is looking at whether Ireland should introduce a mandatory or an auto-enrolment pensions system. A consultation paper was issued with responses due by May. However, there was no indication by 2016 that any recommendations have been finalised.
With an election due in the spring, it seems another government will have completed its term without addressing long-term pension issues. Shortly after assuming power, Enda Kelly’s Fine Gael-dominated coalition government asked the OECD to report on the Irish pensions system. This report is now gathering dust as no formal response has been issued. We cannot continue to ignore that we have an ageing population, vast unfunded state and public sector pension liabilities, half the working population with no pension savings and many of those who do having inadequate savings.
As Ireland is starting to emerge from the economic crisis, it is crucial that policymakers focus on the long-term issues and address these issues. Hopefully the next government will make this a priority.
Jerry Moriarty is chief executive of the Irish Association of Pension Funds